Income And Substitution Effect Of A Price Change Of A Normal Good

The price effect indicates the way the consumer s purchases of good x change when its price changes a given his income tastes and preferences and the price of good y.

Income and substitution effect of a price change of a normal good. In other words the relation between price and quantity demanded being inverse the substitution effect is negative. The substitution effect describes how consumption is impacted by changing relative income and prices. Income effect arises because a price change changes a consumer s real income and substitution effect occurs when consumers opt for the product s substitutes. The decrease in quantity demanded due to increase in price of a product.

An effect due to the change in the price of a good or service leading the consumer to replace higher priced items with lower prices ones is called substitution effect. This is shown in figure 12 18.